Oregon mortgage tax deduction under fire over inequities

Oregon’s mortgage interest tax deduction is facing criticism after an audit found it mostly benefits wealthy, white homeowners in urban counties and is expected to cost taxpayers $1.1 billion between 2021 and 2023.

The MID allows some homeowners to reduce their taxable income by the amount of interest paid on mortgages up to $750K, including second homes. An audit released this week by the Oregon Secretary of State’s office found Oregon’s top 1% of income earners, roughly 18,000 taxpayers, received more benefit from the policy than the 727,000 taxpayers in the bottom 40% combined.

In 2018, alone, the MID reduced state personal income tax revenue by $440 million, or nearly 5% of the total personal income tax liability for the year. Oregon Secretary of State Shemia Fagan slammed the MID as “indefensible” as Oregon faces an affordable housing crisis and counts the ninth-lowest homeownership rate in the country.

“Every dollar spent keeping seniors and working families in their homes or helping renters stay housed has been scrutinized and debated by lawmakers,” Fagan said in a press release. “Meanwhile billions of dollars just walk out the backdoor with no questions asked. I can’t think of a worse example of waste and systemic inequality than that.”

The 34-page audit stopped short of calling to abolish the deduction, instead recommending Oregon lawmakers identify a clearer purpose for the MID and appoint a state agency to evaluate the 99-year-old policy which had never been audited.

The audit acknowledged that there is no data that directly ties race and ethnicity to the MID, but drew the conclusion based on widely reported discrepancies in homeownership rate and income levels by race and ethnicity.

The MID benefits higher-income taxpayers for three reasons, the audit concluded: they’re more likely to itemize their deductions; they’re more likely to own expensive homes, which results in larger deductions; and they have higher marginal tax rates leading to a larger benefit per dollar deducted.

“By providing the largest benefits to those with the greatest ability to pay, the MID is a regressive, vertically inequitable tax expenditure,” the report states.

The audit also found a disproportionate share of mortgage interest deduction benefits by taxpayer population to seven counties defined as urban by the state, including Multnomah County, which includes Portland.

Auditors also interviewed homeownership counselors who said the MID doesn’t address the core challenges from low-to-moderate income borrowers, which are limited funds for a sufficient down payment, high home prices and credit issues.

Oregon’s audit comes the same week Minnesota Rep. Aisha Gomez introduced a bill to eliminate her state’s MID, which Law360 first reported. Thirty states and Washington D.C. offer an MID, the report said, and 12 states offer limits that may mitigate the regressivity of the deduction, such as flat dollar caps, credits in lieu of deductions and phase downs, or reductions of the deductions by fixed percentage for taxpayers above a specific threshold.

The federal government lost $25.5 billion in tax revenue from MIDs, according to data by the Congressional Research Service cited in the audit. The 2017 Tax Cuts and Jobs Act reduced the maximum mortgage that qualifies for the deduction from $1 million to $750K.